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Does This Company Spell Zipcar's Doom?

Zipcar (Nasdaq: ZIP) may have invented the car-sharing industry, but the company's got competition creeping up from all sides. Hertz (NYSE: HTZ) plans to set up its entire 375,000-vehicle national fleet with Zipcar-style keyless access. Avis (Nasdaq: CAR) has employed RFID technology in some of its corporate locations in what could be the first step toward a Zipcar-like business model. And then there's car2go. The subsidiary of Daimler (OTC: DDAIF) recently rolled out in Washington, D.C., its fifth of soon-to-be eight cities in North America, not to mention eight more in Europe.

How it workscar2go's fleet is made up entirely of Smart cars wrapped in an easily visible blue-and-white logo. Its cars are all parked on the street, unlike Zipcars, which generally occupy dedicated parking spots in off-street lots. Users can find car2go locations on the Web, with a mobile app, or by placing a call to a call center. Drivers then use a code to unlock the car.

The service distinguishes itself in a number of key ways from Zipcar.

Renters can use car2go for one-way trips. The inability to make such trips is a key drawback with Zipcar. car2go cars can also be parked almost anywhere on the street that a regular car could, making it more convenient for short trips, while Zipcar is better for out-of-town excursions, or cargo needs, like a run to Ikea.

Both services pay for gas, insurance, and maintenance, but car2go does not charge an annual fee while Zipcar requires a $60 payment each year. One-time fees to join are $25 for Zipcar and $35 for car2go.

Usage rates differ, but car2go is likely to be used for shorter trips, so its rates figure to be higher. In most of the U.S. cities where it's available, car2go charges $0.35 per minute up to a maximum of $12.99 per hour, or $65.99 per day. Zipcar rates, on the other hand, tend to be cheaper by the hour ($8 per hour Monday-Thursday; $11.50 per hour Friday-Sunday), but daily rates are more expensive than car2go's, starting at $74 per day.

car2go features an all-electric fleet in San Diego, as well as another 300 EVs in Amsterdam. Zipcar recently announced it would launch a pilot EV program but has not made the level of commitment to EVs that car2go has.

First-mover advantageOne of the bulls' favorite arguments for Zipcar is its first-mover advantage. The company essentially defined the car-sharing industry, giving it a head start and the brand recognition that other competitors may not have. But despite Zipcar's slim profitability, competition offering similar car-sharing models has been fast to jump in, and not just from car2go or the traditional rental companies. Peer-to-peer car sharing from companies like RelayRides also offers another option for those looking for short-term wheels. The service has spread around the country and puts prospective short-term renters in touch with car owners who set their own prices. Like car2go, RelayRides in a sense takes Zipcar's idea one step further.

So while Zipcar may have been the first mover in the industry, the question remains: Can it remain the top dog? In the fast-growing car-sharing market, these new entrants are sure to be eroding Zipcar's advantage, which works best when the first mover can lock out competitors through a razor/blade model, for example, or another tactic that creates switching costs or network effects. Brand advantages alone are often not enough.

In their 2001 book Will and Vision: How Latecomers Grow to Dominate Markets, scholars Peter Golder and Gerard Tellis researched 66 industries and found that first movers often derive only limited advantages. In fact, many companies, such as Kodak with cameras, Xerox with photocopiers, and Apple with personal computers, are thought of as first movers even though they were actually late arrivals. Their study found that success more often came to "fast followers" who could learn from the mistakes of their competitors and adapt accordingly.

The battle for D.C.Interestingly, car2go has avoided many of the major metropolitan U.S. markets, and is available only in Portland, Austin, San Diego, Miami (coming soon), and Washington, D.C. Of the five, only Washington, D.C., overlaps with one of Zipcar's four established markets, which also include New York, Boston, and San Francisco. In other words, the future of car sharing may be playing out in the nation's capital right now. The city decided last year to auction off public parking spots to interested companies, which attracted interest from Hertz and Enterprise in addition to car2go. As a result, Zipcar lost 80% of its reserved public parking spots in the city.

It remains to be seen whether car2go is a substitute for Zipcar or a complement to it. On Yelp, one self-described loyal Zipcar user from D.C. said, "This is most definitely a great complement to my Zipcar'ing. I've been able to use car2go in ways that Zipcar doesn't work for me." Another said Zipcar's customer service was "Worlds better." Overall reviews are mixed, with others complaining about car2go's card-reading speed, but there's clearly an opportunity for car2go here.

Foolish takeawayZipcar still has a considerable lead in the car-sharing race, with nearly 700,000 members compared to over 100,000 for car2go. The Smart car service is expanding fast, however, and is set to roll out in Toronto, Calgary, and Miami this summer. For now, Zipcar also appears to be the only one turning a profit in car sharing, making a total of $0.03 per share in its last three quarters, while car2go would not comment on profitability. Since it's still in its growth phase, it shouldn't be surprising if the company is operating at a loss.

car2go may ultimately just grow the industry by filling a different need instead of stealing customers from Zipcar, but investors in the first mover would be wise to keep an eye on this newcomer. The Washington, D.C., market should be especially telling over the coming months as to who will ultimately emerge victorious.

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Comments from our Foolish Readers

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The only technical solution that scales to 100's of thousands of cars is Avis's IDSY powered technology. Everyone else needs an RFID card reader installed in the car an embedded cell phone (such as GPRS) to reach back to the corporate server. This is expensive on a monthly basis and takes about an hour to install/deinstall.

The Avis solution takes 1-2 minutes to install and reaches back to the corporate server via a shared 900 Mhz "router". no monthly charge

Avis has 25,000 of these cars installed as of this month. More than every other car sharing company combined

Forgot to mention that the Hertz fleet roll out appears to be on hold as their Eileo solution is having technical issues

Also, Avis has no intention of doing a ZIPlike business model. Avis has publicly stated they see conventional car sharing as being worth it in only 3-4 US cities. They do see it viable in China where there are 4X more drivers than cars. Avis is enabling their cars to save on overhead. These cars can then be self service and placed anywhere, increasing their footprint without the need for people and store fronts

car2go is too little too late and not that big of an innovation. The next big innovation in this space is the peer-to-peer car sharing that a couple of starts in SF have begun to look at. What if you could rent someones car for a few hours while it was just sitting around doing nothing? Wheelz is one of these starts and one that Zipcar is already heavily invested in. The big advantage for Zipcar or any other company getting into the p2p car sharing model is you don't have the heavy upfront investment for the car.

dbtuner - I couldn't see myself participating in a p2p carshare where other people are borrowing my car, but if the company handles background-checks and verification of participants (to prevent "deadbeats" from getting in) and then incentivizes people to make their car available through their program by covering their insurance, performing routine maintenance (oil changes, detailing, etc.), then that may appeal to some people and encourage them to participate. While it may cost something to provide those incentives, it's going to add up to far less than the "heavy upfront investment for the car". I agree that the logistics of sorting through liability and such are some real hurdles.

I'm probably the target market here as someone who fully owns (done with payments) a relatively new model-year hybrid vehicle (2008) that lives in the heart of a city. During the 9am-6pm window on weekdays, I rarely need my car unless I take the day off, have an appointment or want to get away for lunch.

Personally, I'm never going to get past not wanting someone else to drive my car and possibly have something spill in the interior, or a sick person spreading their germs (or worse), or not being able to keep anything personal in the car (nothing valuable just the conveniences: a gate opener/garage door opener, jumper cables, basic tools, flashlights, grocery bags, audio aux cables, parking permits, carry-out menus, bottle of ibuprofen, etc.) and the risk of someone being late returning the vehicle when I need it.

"only Washington, D.C., overlaps with one of Zipcar's four established markets, which also include New York, Boston, and San Francisco."

Wait... what? FOUR markets? I know "established" could be in the eye of the beholder, but of the 50+ cities and 100+ universities where they operate, Zipcar is definitely the uncontested king in just about all of those places. If they're not "established" in Seattle, then I guess I don't know what "established" means. As a Zipster and a shareholder, I might be too impartial, but the idea that the battle between Zipcar and car2go hinges on who wins in D.C. sounds pretty silly to me. I'm going to call Highlander Fallacy on this one. There Can Be More Than One.

I also second the notion that p2p car-sharing sounds like a great idea... for other people.

Sending report...

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